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May 9, 2011

Latest Greece Downgrade Brings Country in Line With Belarus

Comparison to Cold War stalwart does little to reassure foreign investors

As AdvisorOne reported on May 3, Greece had rejected calls to restructure its debt. George Papaconstantinou, Greece’s Finance Minister, said acting on such calls “would be a huge mistake for the country.”

As a result, Greece’s credit rating was cut on Monday two levels to B from BB- by Standard & Poor’s, which said further reductions were possible as the risk of default rose.

Bloomberg reports another cut would make Greece the lowest-rated country in Europe as today’s reduction, the fourth by S&P since April 2010, left it even with Belarus. The yield on Greek 10-year bonds rose 21 basis points to 15.7%, more than twice the level of a year ago when Greece accepted an international bailout.

The S&P decision, according to Bloomberg, came on the first business day after an unannounced Friday evening meeting of European finance ministers May 6 in which they agreed Greece needed more help to avoid a restructuring. Extended repayment terms and demands for collateral may be part of a new aid plan. Moody’s Investors Service on Monday placed Greece’s B1 rating on review for downgrade.

“The downgrade reflects our view of increasing sentiment among Greece’s key euro-zone official creditors to extend the debt payment maturities of their 80 billion euros ($115 billion) of bilateral loans pooled by the European Commission,” S&P said in an e-mailed statement to Bloomberg. “As part of such an extension, we believe the euro-zone creditor governments would likely seek ‘comparability of treatment’ from commercial creditors in the form of their similarly extending bond and loan maturities.”

A year after Greece received a 110 billion-euro aid package that aimed to stem the spread of the region’s sovereign crisis, the nation’s debt was rising as it faced record borrowing costs. Two-year bonds yield more than 25%, indicating investors are betting Greece won’t be able to return to markets as planned under the bailout next year, when it was due to sell 25 billion euros to 30 billion euros of bonds.

Bloomberg notes the difference in yield between Greece’s benchmark 10-year bond and comparable German debt increased 27 basis points to 12.6 percentage points on Monday and the cost of insuring its debt against default reached a record 1,375 basis points.

Greece missed its deficit target for last year, reporting a shortfall of 10.5%, versus a target of 9.6%. Achieving 2011 targets “is uncertain” and the government “may see a restructuring of official and commercial debt as the best way forward,” S&P said.